Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Financial Services/International Trade & Investment, May 2009
The recent publication of a list of individuals and entities designated under Regulations Implementing the United Nations Resolution on the Democratic People's Republic of Korea serves as a reminder that all persons (including individual and entities) in Canada and all Canadians wherever situated (including corporations incorporated or continued under the laws of Canada or a province) should be aware of Canadian sanctions legislation.
WHAT IS SANCTIONS LEGISLATION?
Canada has enacted legislation that implements economic and other sanctions intended to apply pressure on a country, group or individual to comply with international objectives relating to peace and security (Canadian Sanctions Legislation). These sanctions comprise a wide variety of measures, from travel bans to the imposition of legal restrictions and prohibitions on trade or other economic activity between Canada and the target state.
Unlike the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which applies to specific industries, generally Canadian Sanctions Legislation applies to every person (including entities) in Canada and every Canadian outside of Canada, so it may directly impact your business. It is also of critical importance that the concerns addressed by Canadian Sanctions Legislation be considered in the context of mergers and acquisitions and, in particular, during the due diligence process, so as to avoid unwittingly becoming subject to liability for previous contraventions following an acquisition.
There are five principal statutes that comprise Canadian Sanctions Legislation:
1. Criminal Code. The Criminal Code (the Code), which prohibits every person in Canada and every Canadian outside Canada from dealing with property of certain entities identified in the Regulations Establishing a List of Entities and imposes specific reporting requirements relating to such property.
The Code also sets out several offences relating to money laundering and the financing of terrorism that apply to every person in Canada.
2. United Nations Act. The Canadian government implements enforcement measures taken by the United Nations Security Council to maintain or restore international peace and security through the United Nations Act. These measures are introduced into domestic law through regulations under the United Nations Act (the U.N. Regulations) and target specific countries, persons and groups identified by the United Nations Security Council. Currently, in addition to such regulations against the Democratic People's Republic of Korea (North Korea) there are U.N. Regulations against Iran, Lebanon, the Sudan and several other countries. While the subject matter of the sanctions imposed by the U.N. Regulations vary depending on the subject matter or target of the sanctions, generally they include comprehensive trade sanctions and more targeted measures such as arms embargoes, prohibitions against dealing with property of certain persons and the provision of financial services and reporting requirements.
3. Special Economic Measures Act. Absent a United Nations Security Council resolution, the Canadian government has the authority to impose sanctions with respect to foreign countries pursuant to the Special Economic Measures Act (SEMA). SEMA gives the Governor in Council the authority to make orders and regulations that restrict or prohibit certain activities in relation to a foreign state for the purpose of implementing a decision, resolution or recommendation of an international organization of states of which Canada is a member, or where the Governor in Council is of the opinion that a grave breach of international peace and security has occurred that has resulted or is likely to result in a serious international crisis. Currently, the Governor in Council has used his authority under SEMA to enact regulations in response to the recent humanitarian crisis situations in Burma (Myanmar) and Zimbabwe. Further to these sanctions, which are broadly framed in their scope and application, any new investments either from Canada or by a Canadian wherever situated in either jurisdiction is expressly prohibited and subject to extensive criminal and civil liabilities for violation of the terms of the sanctions regulations.
4. Foreign Extra-Territorial Measures Act. The Foreign Extra-Territorial Measures Act (FEMA) allows the Canadian government to protect Canadian interests against foreign courts and governments wishing to apply their laws extraterritorially to Canada. This is done by authorizing the Attorney General to make orders relating to the measures of foreign states and tribunals affecting international trade or commerce.
Currently, the only such order is the Foreign Extraterritorial Measures (United States) Order, 1992 (the FEMA Order), issued in response to U.S. sanctions against Cuba. The FEMA Order makes specific reference to the Cuban Asset Control Regulations in the United States and other laws having a similar purpose. It prohibits a Canadian corporation, including its directors and officers, managers and employees, in respect of any trade between Canada and Cuba, from complying with (i) an extraterritorial measure of the United States; or (ii) with any communication relating to such a measure that the Canadian corporation has received from a person who is in a position to influence the policies of the Canadian corporation. The FEMA Order also requires Canadian corporations and directors and officers of a Canadian corporation to give immediate notice to the Attorney General of Canada of any direction in respect of an extraterritorial measure of the United States.
5. Export and Import Permits Act. The Export and Import Permits Act imposes export and import trade controls on goods from specific countries or specific types of goods. While strictly speaking not a sanction, it nevertheless has potential application and should be considered in a wide range of cross-border shipments or transactions. The controls are accomplished primarily through the following three regulations:
- the Area Control List (the ACL);
- the Export Control List (the ECL); and
- the Import Control List (the ICL).
The ACL is a list of countries to which the Governor in Council has deemed it necessary to control the export of any goods. Currently, the only countries on the ACL are Burma and Belarus. You will require a permit to export goods to these countries.
Both the ECL and the ICL are lists of goods that the Governor in Council has deemed necessary to control for certain enumerated purposes. For example, Canada closely controls the export of military goods and technology to countries that (i) pose a threat to Canada and its allies, (ii) are involved in or under imminent threat of hostilities or (iii) are subject to United Nations Security Council sanctions. If you are exporting or importing goods identified on the ECL or ICL, you will require a permit to do so.
Other Government Department Requirements
In addition to the five principal statutes discussed above, a number of provisions in statutes administered by other government departments regulate trade as it applies to specific goods. For example, the Canadian Food Inspection Agency enforces provisions applicable to the trade of various food and agricultural products pursuant to the Canada Agricultural Products Act, the Feeds Act, the Fertilizers Act, the Fish Inspection Act, the Health of Animals Act, the Meat Inspection Act, the Plant Protection Act and the Seeds Act. Restrictions on trade that are imposed under the Wild Animal and Plant Protection and Regulation of International and Interprovincial Trade Act are enforced by Environment Canada. Transport Canada administers restrictions on trade pursuant to the Transportation of Dangerous Goods Act and the Motor Vehicle Safety Act. Depending on the goods at issue, a range of other legislative and governmental requirements may apply to regulate trade.
HOW SANCTIONS LEGISLATION AFFECTS YOUR BUSINESS
As noted above, generally Canadian Sanctions Legislation applies to every person in Canada and every Canadian outside Canada. The requirements under Canadian Sanctions Legislation will vary depending on the nature of your business and may include:
- trade prohibitions, including prohibitions against providing brokerage services, financial services or entering into financial transactions relating to property owned or controlled by a designated person – this prohibition applies to services provided directly or indirectly and is very broad in scope;
- a requirement to seize or freeze property (including " money) of designated persons that may be in your possession;
- disclosure obligations to the Royal Canadian Mounted Police, and in some cases, to the Canadian Security Intelligence Service and FINTRAC;
- a requirement to determine, on a continuous basis, whether you are in possession or control of property belonging to a designated person and submit monthly reports to your primary regulator (applies to certain entities only); and
- a requirement to notify the Attorney General of Canada if you receive any communications relating to an extraterritorial measure of the United States in respect of any trade or commerce between Canada and Cuba from a person who is in a position to direct or influence the policies of your business in Canada (applies to Canadian corporations only).
To determine whether you are dealing with property of a designated person, you may want to consider the following steps:
- before accepting a new customer or doing a transaction with or on behalf of a customer, check the OSFI Lists and the DFAIT Lists to ensure that the person is not listed.
- if the customer is found to be on any of these lists, investigate whether your proposed business with that customer is prohibited.
- any property – including any money – which you are holding on behalf of a customer whose name appears on one of the OSFI Lists or DFAIT Lists will likely have to be frozen.
- screen your entire customer database against the OSFI Lists and the DFAIT Lists on a regular basis – for example, on a weekly or bi-weekly basis – and whenever your customer database, the OSFI Lists or the DFAIT Lists are updated. You can consider obtaining software to do this automatically, depending on the size of your business.
- check the names of any potential employees and prospective vendors against the OSFI Lists and the DFAIT Lists prior to entering into employment or business relationships with them.
You may also want to establish compliance policies and procedures, including employee education, to ensure screening is conducted and "hits" (including "false positive hits") are dealt with appropriately.
Clients that are subject to the requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act may also want to rate customers located in countries subject to Canadian Sanctions Legislation at a higher risk for money laundering and/or terrorist financing activities.
LISTS OF DESIGNATED PERSONS
How do you know whether or not you are dealing with property of a designated person? OSFI (the OSFI Lists) and the Department of Foreign Affairs (the DFAIT Lists) each maintain lists of individuals and entities designated under Canadian Sanctions Legislation. Click here to view the OSFI Lists. Click here to view the DFAIT Lists.
The OSFI Lists and the DFAIT Lists must all be checked, as none of them covers all Canadian Sanctions Legislation.
On May 4, 2009, OSFI released a list of individuals and entities designated under the Regulations Implementing the United Nations Resolution on the Democratic People's Republic of Korea. This list is now included with the OSFI Lists.
You should be aware of the following consequences for complying or failing to comply with the applicable requirements of Canadian Sanctions Legislation:
- In some cases, the applicable Sanctions Legislation specifically provides that there is no civil liability for freezing assets of a terrorist person or group.
- In some cases, there is criminal, or criminal and civil, immunity for good faith disclosure or reporting. However, where the legislation does not provide such immunity, your compliance with the asset freeze, disclosure and reporting requirements may result in an allegation that you have breached a contract with your customer. You may want to draft your contracts with these requirements in mind to protect yourself rather than rely on a "required by applicable law" provision or defence.
- Of course, failure to comply with the applicable requirements under Canadian Sanctions Legislation is an offence which can result in fines or imprisonment or both.
- Any publicity on this issue, but particularly related to non-compliance, is likely to have reputational risk.
- Finally, indemnities are not a complete solution in these circumstances, as they cannot make up for a conviction or damage to reputation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.